The Balance of Payments: Meaning and Significance (CRS Report for Congress)
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| Release Date |
April 30, 2003 |
| Report Number |
RL31220 |
| Report Type |
Report |
| Authors |
Gary J. Wells, Visiting Fellow, Foreign Affairs, Defense, and Trade Division |
| Source Agency |
Congressional Research Service |
Summary:
This report provides a basic discussion of the U.S. balance of payments (BOP). The BOP is a
systematic accounting of the U.S.'s international transactions for a specified period of time. It is an
economic indicator that is followed closely by Members and Committees concerned with
international trade and financial flows. The BOP measures flows between U.S. and non-U.S.
residents. Transactions involving items capable of directly satisfying economic needs and wants are
recorded in the BOP's current account. These are further distinguished as goods and services trade,
receipt or payment of income from investments, and one-way (unilateral) transfers. The capital and
financial accounts capture transactions involving asset transfers (e.g., ownership transfer of equities
between residents and non-residents).
The BOP is organized as a double-entry bookkeeping system. As a result, credits (i.e., inflows
of funds) are, in principle, offset by debits (i.e., outflows of funds). However, difficulty in gathering
accurate information creates a statistical discrepancy. To ensure credits and debits sum to zero the
statistical discrepancy is calculated as the sum of all BOP transactions with the opposite sign.
A key element of the BOP is the balance of trade (BOT). The BOT equals exports minus
imports of goods and services. The BOT is used to quantify the trade deficit (i.e., imports exceeding
exports). From the early 1990s until the third quarter of 2002 the U.S. trade deficit grew from less
than 1% of U.S. gross domestic product (GDP) to more than 4%. Because of the BOP's dual entry
bookkeeping organization, the trade deficit must be offset by other transactions. Typically, a net
investment inflow into the United States provides the bulk of the required offset. That is, in order
to purchase U.S.-based assets foreign investors acquire the net outflow of dollars generated by the
trade deficit.
Many analysts believe the trade deficit is not sustainable and that the attractiveness of foreign
investments will gain ground relative to U.S. investments. This will encourage domestic investors
to send more investment funds out of the country while also encouraging foreign investors to send
less to the United States. Both would make it more difficult to fund U.S. imports at current levels.
Two possible scenarios have been formulated to explain how the trade deficit might fall--soft and
hard landings. With a soft landing the trade deficit gradually falls allowing exchange rates and other
economic measures to adjust; the adverse impact on the economy is thought to be minimal. A hard
landing, on the other hand, would entail a dramatic fall in the value of the dollar and insufficient
time for the economy to adjust. A recession may ensue.
The terrorists events of September 11 and the weakening economy had the potential to trigger
a hard landing, but the data do not indicate that this is happening. The exchange value of the dollar
relative to widely-traded currencies has steadily weakened since the beginning of 2002, but at the
same time its value has strengthened relative to less widely-traded currencies.
